The Federal Reserve and Federal Deposit Insurance Corporation rejected the resolution plans or living wills of five systemically important US banks including J.P. Morgan, Bank of America Merrill Lynch and Wells Fargo after finding them not credible.
Under the 2010 Dodd Frank Act systemically important banks are required to formulate credible plans to dismantle their institutions in the event of a catastrophic failure.
If the plans are not found to be credible by the Fed and the FDIC, the banks could be forced to restructure - simplifying operations until they could be reasonably wound down or be forced to divest from them.
The five rejected banks, including Bank of New York Mellon and State Street, received joint notices detailing deficiencies in their plans and actions they must take to address them. The banks have until October 1 to remediate deficiencies or "be subject to more stringent prudential requirements," the regulators warned, including more stringent capital, leverage, or liquidity requirements.
"We think the issues are resolvable and are not structural in nature," said Citigroup analyst Keith Horowitz in a note. "Our initial take is that this is more of a cost issue, meaning it can be addressed through investment, rather than a structural issue that needs to be resolved," he said.
J.P. Morgan had four deficiencies across five subcategories, with two shortcomings. The bank was the only one to have deficiencies with derivatives and trading activity, receiving feedback that support for their "shrink" strategy was insufficient and they lacked a contingency plan, Horowitz wrote.
Citigroup was the only one of eight US systemically important banks to have its plan approved, despite "shortcomings". The regulators were split in their views of Goldman Sachs' and Morgan Stanley's plans. The FDIC, and not the Fed, determined Goldman's plan was not credible while the Fed, not the FDIC, found Morgan Stanley's plan was not credible.
The agencies jointly identified weaknesses in the 2015 resolution plans of Goldman and Morgan Stanley, but did not make joint determinations regarding the plans and their deficiencies. All eight US systemically important banks will have to submit revised plans next year by July 1, 2017. Resolution plans submitted by Barclays, Credit Suisse, Deutsche Bank and UBS for their US operations last year are still being reviewed.